Debt Settlement Pros and Cons

Long-term debt settlement is dangerous for consumers. That’s why I limit my debt settlement services to consumers who have an asset or financial resource that enables them to settle their debts right away. It is critically important that you understand the risks and dangers that you may be exposed to if you settle your debts over a longer period of time.

When you’re struggling financially, I can’t stress enough to you how important it is for you to make an informed decision about how you choose to deal with it. A long-term debt settlement approach is no picnic. When you put yourself in position to be chased after by debt collectors for years, you expose yourself, and potentially anyone who is close to you, to an exorbitant amount of stress and uncertainty that may persist until you resolve your final account.

Please take the time to read this information as it will help you think about what most debt settlement companies will neglect to tell you.

This page is part 3 of a 4-part series that explains how debt settlement works. If you haven’t read the previous parts, please start here so you can gain a better understanding about the information on this page.

Uncertainty of Cost and Outcome

According to the Federal Trade Commission, less than 10% of consumers who hire a long-term debt settlement company settle ALL of their debts.

Please, let that sink in. According to our Federal Government, you have a 90% chance of failure when attempting to settle your debts via a long-term method. Here’s a link to the report. You can reference the 10% figure on the second page in the first paragraph.

Here’s what failure could look like:

A lot of consumers who participate in a long-term debt settlement plan only settle half of their enrolled debts.

If you have already read Part 2 of this series this may make sense to you, now that you’re aware of the “typical” collection cycle. Remember, most of these debt settlement companies offer 36- and 48-month programs.

Let’s look into the future for a moment and use a typical 36-month debt settlement plan as an example. If you settle half of your debt, it’s safe to assume that it would take you half the length of the program.

In this case, 18 months. Please keep in mind that this means you haven’t made any payments to your creditors for at least 18 months.

This means your remaining accounts will be charged-off and you will be in very dangerous territory.

It also means the balances on your remaining accounts may be much higher due to the possible exposure to 18 months worth of interest.

In respect to your credit, you won’t fully begin to recover until you resolve all of your delinquent accounts. So you received very little benefit to rebuilding your credit at this point in the process.

All of the money you spent on your settlements and the fees you paid to the debt settlement company is potentially wasted if you don’t find a way to resolve your remaining accounts. Which is questionable, considering you just unenrolled from your debt settlement service in this scenario.

And it’s not uncommon for people to find themselves with one or more pending lawsuits against them and end up filing for bankruptcy protection.

If you find yourself in that situation, this means you did waste all of the money you spent on the settlements.

And, it also means, you wasted all that time. Considering that if you filed Chapter 7 bankruptcy to begin with, you would be 18 months into the rehabilitation process.

And, you should realize, that if you did file Chapter 7, all that money you wasted on the settlements could have been used to build up your financial security after your bankruptcy.

This is one of the main reasons why I review your ability to settle your debts via your assets rather than your future income. My average client settles ALL of their debts in 108 days. By coordinating and negotiating all of your enrolled accounts at the same time, prior to your paying anything to anyone, including me, I eliminate this risk completely.

The worst case scenario is that you may have some available settlements that may not be low enough to allow you to settle. In this situation I give you some choices:

I can continue negotiations with all of your creditors while I attempt to gain cooperation from the less negotiable one(s).

Or you may choose to settle the ones that make sense and have me continue to negotiate the remaining account(s) to make a lower settlement.

Or you may have me negotiate a payment arrangement for you free of charge.

Or you may unenroll the account(s) from my service, so you may save up additional funds to settle it/them in the future.

In the event that you do not like the result and choose not to settle any of your debts, there will be no charge.

Another huge vulnerability is the evolving landscape of your collectability…

Why do I offer my services in a such a unique way (settling them all at the same time)? Because of the potential negative reaction that may be created when settling your debts one at a time.

Debt collectors look for previously settled or paid collections or charge-offs on credit reports. When debt collectors see previously paid or settled collections or charge-offs on your credit report, they’re more likely to be less negotiable. A debt collectors job is to collect as much of the balance as possible. And since most debt collectors are compensated with a percentage of what they collect, they’re financially motivated to do so.

It is important that you understand the reason why collectors, attorneys, and creditors negotiate settlements.

They do so due to your collectability. The more collectable you are, the less negotiable they are.

Since only 1 out of 5 people who have a debt in collections ever pay their bill, consumers who have settlements appearing on their credit report are viewed as VERY collectable. It’s only common sense to realize that if people settle some of their debts, they’re going to want to settle any remaining ones. As you settle your debts, your financial landscape changes, and so does the potential flexibility of your remaining creditors.

Furthermore, previously settled or paid charge-offs and collections on credit reports can increase your chances of being sued. If you have multiple accounts in collection, it’s important you understand that debt collectors are competing with each other. A common tool that debt collectors use to make their account a priority over the others is to sue you.

When you settle debts, one-by-one, over an extended period of time, you are actually increasing your chances of failure.

Potential for Litigation

The main issue with long-term debt settlement is it puts you in an adversarial position with your creditors over a long period of time…

When you attempt to settle your debts over a period of years, you won’t be making any payments to them. The only time your accounts will be financially addressed is when they are actually settled.

Naturally, when you don’t pay your creditors, you expose yourself to the risk of lawsuits.

The risk of lawsuits is increased further when a debt settlement company prematurely represents you (contacts your creditors when no financial ability to settle exists).

Why? Since most debt settlement programs are designed to take 36-48 months, debt collectors realize that it could be potentially years before the account may be collected if they just wait on the debt settlement company. So debt collectors may find it to be logical to refer the account to their legal department to speed up the collection process in an attempt to make their account a higher priority to be settled.

If an account does go this direction, possible attorney fees, court costs, and back interest may be added to your balance above and beyond any legal fees you may incur to deal with it. If the debt collector is successful and obtains judgment against you, the judgment may be exercised by placing a lien on your property, levy on your bank account, or by garnishment of your wages. Not to mention the increased likelihood of a higher cost and higher percentage settlement.

The longer your delinquent accounts remain outstanding, the greater the likelihood that this will occur.

This is one of the main reasons why the only way to reliably settle someone’s debt is to review their ability to resolve their debts via their assets rather than their future income.

When you settle your debts over time, by funding your debt settlement program with your income, it’s pretty much game over if you’re garnished. Simply because, the garnishment would more than likely eliminate your ability to continue to fund your debt settlement program.

Debt settlement is only viable if you’re able to settle your debts quickly. If you can, you reduce your exposure to this situation greatly.

Debt Settlement and Your Credit

If your situation is temporary, I will generally only extend my services if you’re delinquent on your accounts by 60 days or more. The purpose behind this policy is to ensure that I do not impair your good credit.

I do this so you have some time to resolve your temporary situation in an effort to maintain your good credit. Debt settlement will cause your credit harm, so if you’re in a temporary situation, it is generally in your best interest to solve your problem in a manner that will preserve the good credit you have worked so hard for.

If this describes your situation, you may want to read my article about how to avoid debt relief programs.

If you are less than 60 days behind and your situation isn’t temporary and you’re looking for an exit strategy from your debt and are no longer concerned about your credit, I make my services available immediately.

How Debt Settlement Reports to Your Credit Report

When you settle a debt that exists on your credit report, it will report differently than if you paid it in full.

If you settle, it will typically state “settlement accepted on this account” and it will show a zero balance. They generally will not report what you settle for. So if you settle for 80%, or 40%, it will typically show up the same way.

If you pay your account in full, it will state “paid in full” and it will show a zero balance as well. Naturally, paid in full is better than settlement accepted on this account.

For the purpose of credit rehabilitation, your future creditor will generally determine your credit worthiness by your credit score, and by reviewing the length of time since the delinquent accounts have been satisfied. The term satisfied is accomplished with either outcome.

It typically takes approximately 2 years to reestablish your credit after settling your last delinquent account.

Long-Term Debt Settlement Programs and Your Credit

3–4 year debt settlement programs generally take approximately 5–6 years to recover from.

You should know that people who file for Chapter 7 bankruptcy generally recover credit-wise within about 2 years of filing.

So the logic that I use is why expose people to the risks of a long-term debt settlement plan if it’s going to take them years longer to recover from it versus a Chapter 7 bankruptcy? For most people, the service is senseless.

If you can qualify for a Chapter 7 bankruptcy, you will generally reestablish your credit 3 years faster by filing bankruptcy versus a 36-month debt settlement plan.

Interest, Over-Limit and Late Fees

Your creditor may have a clause in their terms and conditions that permits them to raise your interest rate once you become delinquent by more than 60 days.

When an account is delinquent and in a pre-charge off stage, the account may also be subjected to over-limit and late fees until the account charges off.

If you are currently on time with your payments, expect the balances on the accounts that you wish to settle to increase by approximately 10% between now and when they charge off. If you are debating settling smaller balanced accounts ($1,500 or less), expect those balances to increase by approximately 20%.

In the current collection environment, post-charge off interest isn’t generally being assessed to bank related accounts, such as credit cards, if the accounts are settled previous to any lawsuits being filed. However, if you’re debating debt settlement, it’s important to figure out a way to settle your debts quickly because your account may be assessed post-charge off interest if the debt collector or debt buyer obtains a judgment against you.

If you are considering a long-term debt settlement program, I can’t emphasize enough, how important it is to forecast your exposure to interest.

Picture it in your head for a minute. Imagine your balances continuing to climb until they’re resolved. The interest in the first 6 months is generally ridiculous. Think about what your balances could grow to over 2, 3, 4 years.

It is possible that your charged-off credit cards could end up with balances that are significantly higher than they were when they originally fell behind.

Debt Settlement and Taxes

Expect your creditors to send a 1099c for the amount of the difference between your balance and what they agreed to settle for. Fortunately, there is an insolvency form that you or your accountant can provide to the IRS when filing your return. This insolvency form acts as a worksheet for your overall debt versus your overall assets.

If you have more debt than you do assets, you may be considered insolvent to the extent that your net worth is negative. Thus, potentially resulting in an exemption from these taxes or a reduced amount of tax liability.

This calculation is made by adding up the total value of your assets and the total of your liabilities and subtracting the two totals from each other.

If you are still current with your obligations and don’t qualify for the insolvency exemption, you may find that settling your debts may not make sense for your situation.

During your free consultation with me, I will assess your potential exposure to taxes in a cursory manner. If you decide to employ my services, I will ask you to seek out a tax professional to gain a professional opinion on your tax exposure prior to extending my service.

The last thing you want to do is go into debt settlement blindly, as you do not want to transfer your debt problems from your credit card companies to the IRS.

I was formerly one of the most successful debt collectors in the country. And don’t worry, I wasn’t one of those huffy-puffy types. I also held positions of Collection Manager, Corporate Trainer, and Director of Collection Operations. I’ve worked for large third-party collection agencies, collection attorneys and large debt buyers. (full bio)

I’ve dedicated my website towards truly explaining how debt settlement really works and to dispel the myths revolving around credit and debt. …

If you are considering getting help with your debt, please take the time to educate yourself by reading these featured articles:

This is part of a 4-part series that is designed to help you view debt settlement from every angle. If you’re debating debt settlement, please take the time to read them all. It will benefit your position of knowledge greatly.

We’re the only debt settlement company he has EVER allowed on his referral list.

Tom Martino has been fighting for consumers for more than 30 years utilizing Radio, TV, Newspapers, Magazines, and the Internet. Tom can be heard weekday mornings on the radio from 9 to noon on Denver’s popular AM talk station 630-KHOW. Each show is filled with calls from people needing consumer help, information, and advice.

Debt Relief Á la carte is not a credit repair company. We do not provide legal, tax, or investment advice. If you need legal advice, legal expertise, or court filings, you must seek the advice of a licensed attorney. Estimates are based on your collectabilty, our past experience, and settlement performance trends. Individual results may vary. The claims made are examples of past performance and are not intended to be a guarantee of any future settlement results. We do not provide debt settlement services in all states. We use reasonable care to ensure that the information appearing on this website is up to date and accurate. While we take precautions to prevent the occurrence of errors and omissions, the users of this website should not take the accuracy of the information for granted but should seek individual professional advice that is relevant to their particular situation and needs.